What happened 

The news couldn't have been much worse for Bitcoin (CRYPTO: BTC) and cryptocurrencies today. inflation in the U.S. came in higher than expected at 0.1% last month, with core inflation up 0.6%. This was despite investors thinking that inflation may be slowing, which could have opened the door to the Federal Reserve slowing its pace of interest rate increases. 

Shares of Bitcoin-related stocks were trading near their daily lows at 3 p.m. ET. Riot Blockchain (NASDAQ: RIOT) was down as much as 9.8%, Bitfarms (NASDAQ: BITF) had fallen 10.6%, Marathon Digital (NASDAQ: MARA) dropped 10.9%, HIVE Blockchain Technologies (NASDAQ: HIVE) declined 11.3%, and Hut 8 Mining (NASDAQ: HUT) fell as much as 14.6%.

So what 

Bitcoin is down 9.9% as I'm writing to $20,245, which seems bad, but the cryptocurrency is still up 7.4% over the past week. But when Bitcoin drops rapidly, it can often cause Bitcoin mining and related stocks to drop dramatically as well. This happens for two reasons. 

First, Bitcoin miners are generating Bitcoin as revenue, so when the value of Bitcoin drops, their revenue effectively does as well. Second, these companies often hold significant Bitcoin reserves on their balance sheets, so a drop in Bitcoin actually means a loss in value on the balance sheet as well. 

As all of this is happening, Ethereum (CRYPTO: ETH) is moving quickly toward The Merge in the next day or so, which will give the cryptocurrency significant advantages over Bitcoin. The Ethereum blockchain won't be as energy intensive as Bitcoin's and has the smart contract capability that Bitcoin can't compete with. There are a lot of investors who think this will shift value from Bitcoin to Ethereum. 

We have already seen miners on Ethereum's proof-of-work blockchain suffer because they'll have no work to do after The Merge's move to proof of stake. That's the macro trend of all cryptocurrencies, and Bitcoin doesn't have an answer to lower energy usage right now. 

Now what 

Bitcoin, in particular, was supposed to be a hedge against inflation. But that hasn't been the case for at least a year now, and the cryptocurrency trades more like a speculative asset than an inflation hedge. 

What I would be worried about for Bitcoin miners is a continued decline in Bitcoin's price after The Merge. Ethereum is a compelling alternative with much more functionality as a form of payment and innovation than Bitcoin. And with the focus on energy usage and environmental impact across the technology industry, the more than 99% reduction in energy usage after The Merge will be compelling. 

I don't think Bitcoin miners have a great business model in today's market, and that's what keeping me out of these stocks. They're mainly playing arbitrage against the price of Bitcoin and the cost of mining a Bitcoin. If that arbitrage goes to zero, the entire business model falls apart quickly and once-solid balance sheets could become a liability. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Why Bitcoin plunged on Tuesday appeared first on The Motley Fool Australia.